Fudge that solves little in banking system

The relief in the nation’s banking parlours – and the rise in bank stocks – spoke volumes as the mild-mannered Independent Commission on Banking presented its report yesterday.

Instead of the radical shake-up which many of us hoped the high-level panel would produce, it has opted for safe solutions which will do nothing to puncture the arrogant complacency of the banking system.

Indeed, many of the proposals for making the culture of banking safer
are already in train globally, including the requirement that banks hold
much more capital – to protect against future disasters – and better
separation of their ‘casino’ and retail activities.

Safe solution? Sir John Vickers headed the report into banking system

While the report does suggest those two arms of the banks are organised separately, it stops short of saying they should become separate companies, each with their own management and stock-market listing.

So any hopes that the ICB has come up with some stunning new ideas have been scotched at the outset. As Gordon Brown has now admitted, the ‘big mistake’ was that he failed to recognise the ‘entangled’ state of UK banking.

It is significant that of the big four British-owned banks on our high streets – HSBC, Barclays, Royal Bank of Scotland and Lloyds – the only one to raise objections to the proposals in the new study is Lloyds, in which we, the taxpayer, own 44 per cent.

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It accuses the commission of casting a cloud of uncertainty over its future, and failing to provide the evidence that it is strangling competition on the high street.

It has been suggested that Lloyds, which dominates current-account banking with 30 per cent of the whole market, ought to shed more than the 600 branches which it has been ordered to sell by the European Union.

That is no more than a statement of the obvious evident long before the commission, headed by competition expert Sir John Vickers, began its work. Walk down any high street in Britain and you will pass Lloyds branches masquerading under brands it owns.

In the build-up to the publication of the report, there was constant bleating by the banks about over-regulation, government interference and taxation, yet we should never forget what a catastrophe the combination of avaricious banking practices and Labour’s soft-touch regulation proved to be: it was among the main causes of the runaway budget deficit which led to current cuts.

The crisis has blighted everyone in Britain, adding some 800,000 to the unemployment rolls so far and crushing economic growth, and it will squeeze and continue to squeeze the incomes – after inflation – of ordinary people for years.

And, believe it or not, we have still to see the full extent of the banks’ foolishness.

Loans made by UK banks to banks and property companies in troubled Eurozone countries could still go horribly wrong, adding to the instability.

Much of the ICB study focuses on whether it is sensible for investment or ‘casino’ banks – which thrive on trading in international markets – to be housed under the same roof as the retail or utility banks which offer services to ordinary consumers and businesses.

The banks love the arrangement because the cheap retail deposits from the public, many held in current accounts which pay no returns at all, are virtually free money which they can use to invest in their ‘casino’ banking arms. But as we saw at the height of the great panic in 2008, when the investment banking goes horribly wrong, ordinary deposits are endangered.

The Governor of the Bank of England, Mervyn King, has testified that the cash machines at RBS and Lloyds came within hours of running out of money. It was this fear that ordinary depositors would lose life savings which led to the terrifying conclusion by the Labour government that the banks are ‘too big to fail’ – and to the huge government bailouts.

The ICB report recommends that we should have a system in which it were possible for, say, Barclays Capital, the investment banking arm of the bank, to fail, but leave ordinary branch customers of Barclays untouched.

A worthy idea, perhaps, but it misses the point totally. Almost unnoticed, since the great panic set in, the boards of the big banks (in some cases aided and abetted by the government) have allowed the investment bankers to move into the top jobs.

Barclays is headed by the most highly paid banker in Britain, the New Yorker Bob Diamond; in charge at HSBC is former head of investment banking Stuart Gulliver; the boss at state-owned RBS is City investment banker Stephen Hester, and even Lloyds (largely a retail bank) has an investment banker, Sir Win Bischoff, as chairman.

The very people who were at the heart of the financial crisis now find themselves in charge of the banks, and the priority is get-rich-quick investment banking.

That’s why the commission should have gone further and recommended a full split between the consumer and investment arms.

Where the two types of banking sit side by side, the retail/branch banking will always be the poor relation. So while there are perfectly good financial safety reasons for separating out the two functions there are even better social and consumer reasons for doing so.

Until retail banks are treasured for what they should be there for – serving the customer – there will never be the intense focus on dealing with the needs of small business which the customers need.

The tycoons who run our big shopping groups, from M&S to Tesco, make sure they spend time in the stores watching and listening to customer needs. The idea that Bob

Diamond would tour Barclays branches is fanciful – even though the complaints of his retail customers reached record levels in the first half of 2011.

The new commission report does deal with the issue of competition. Among other things, it suggests that it should be far easier for consumers to switch bank accounts.

Does this sound familiar? It should do – it was precisely what the Cruickshank commission which reported to then-chancellor Gordon Brown in March 2000 recommended. More than a decade later, nothing has changed.

In fact the situation has become much worse. The collapse or near-collapse of banks such as Northern Rock, Bradford & Bingley and Alliance & Leicester, and the absorption of HBOS into Lloyds to create the ‘big bank’, means that real choice for the customer has diminished, as the ICB reports.

This is a situation which will never change while investment banks and consumer banks sit side by side in the same organisation.

The consumer arm will never be regarded as anything but second best by the top executives, who focus most of their attention of finding ever better ways of awarding investment bankers vast bonuses (more than 1,000 received £1million last year) while the clerks, tellers and branch managers are paid a relative pittance.

The Government needs to send the ICB back to work and demand the radical break-up which is required if customers and small businesses – the backbone of Britain – are to get the attention and service they deserve.